Why do the rich go broke? The question is titillating a little like peeking in the bathrooms of the Rich and Famous. And for those purposes, Timothy O’Brien’s piece in the NYT this morning is perfectly suited. Lots of juicy details about how the once-rich ran through their money.
But there is an interesting tangle in the analysis. While the dominant chord of the piece is about the man-child and instant gratification (giggle, giggle), business reversals also explain why some of the high and mighty suddenly crash back to earth.
So, for example, Buffalo Bill Cody is noted for having raked in about $30 million in the Chicago World’s Fair. He lost it in the financial panic of 1907 and died without enough money to pay the undertaker in 1917. Welcome to a free market economy. Or go back a bit further. Robert Morris (a story told in rich detail in Republic of Debtors, not the NYT story) was a wealthy man who bankrolled much of the American Revolution, then got caught short in land speculations, seeing the value in places like Washington just a little too early. He spent a long stretch in debtor’s prison, and his fortunes never recovered.
There are three points here: First, bankruptcy is about many things, including business failure. Those who roll the dice and get very, very rich sometimes roll it again and get very, very poor.
Second, it isn’t necessary to be rich to go broke in business. Professor Robert Lawless and I did some work that suggests that about one in seven bankruptcy cases classified by the government as personal are in fact failed entrepreneurs.
Third, the stories of silliness are much more entertaining than the stories of bad business gambles. Those bad business gambles are a reminder that entrepreneurs take enormous financial risks and they are one of the reasons to preserve a strong, effective bankruptcy system. When Congress changed the laws on consumer bankruptcies, they preserved enough loopholes to protect George Foreman if his investments take another reversal. But for lots of ordinary folks trying to run their own small businesses, the changes in consumer bankruptcy took away their safety net as well.
